In sickness or in wealth

The U.S. Census Bureau has adopted a new, more comprehensive Supplemental Poverty Measure (SPM) that accounts for various safety net programs. The new measure takes into account the hundreds of billions of dollars provided to the needy—including food stamps and cash assistance programs—and makes adjustments for major expenses such as out-of-pocket medical spending, income, and taxes. According to the new measure, out-of-pocket health spending alone added 10 million people to the ranks of the poor in 2010 (figure 13.1a).

How does it do this? The new measure for the first time indirectly accounts for the benefits provided by Medicaid (health insurance for the poor) and Medicare (health insurance for the elderly and disabled) by subtracting out-of-pocket medical expenses from income to determine the net amount available to spend on necessities such as food, clothing, shelter, and utilities. It does not replace the “official” poverty measure—that is still needed to determine eligibility for such safety net programs—but it provides a more realistic depiction of poverty in America. (Unlike the traditional poverty measure, it also accounts for the cost of living in different parts of the country.)

Compared to the traditional poverty measure, the SPM reduces the measured poverty rate among children. Why? Many children are covered by Medicaid or the Children’s Health Insurance Program, both of which require very little in the way of premium payments or cost sharing (deductibles or copayments).

In contrast, researchers were somewhat surprised to see how much the new methodology increased measured poverty among the elderly. After all, they have near-universal coverage through Medicare, much of which also is tax-financed.

But, as I have explained elsewhere, Medicare is not particularly good coverage compared to health plans provided by most large employers, including the federal government. Many seniors secure private supplemental health insurance to fill the gaps, paying premiums to do so. Such premiums count as out-of-pocket spending under the SPM; hence seniors have less net income to spend on necessities, leading to an increase in measured poverty.

What is astonishing is how much of a difference this single adjustment makes. If seniors had no medical out-of-pocket expenditures, their measured poverty rate would be nearly 50 percent smaller than using the SPM (compare the last two bars on the right in the chart above). The estimated number of elderly below poverty using the SPM but excluding medical out-of-pocket costs is nearly identical to the number of elderly below poverty using the old measure. Put another way, factoring in out-of-pocket medical costs adds 1.7 million to the ranks of the elderly poor and more than 10 million to the overall number of poor in America. In 2010, this single factor increased the measured poverty rate from 12.7 percent to 16.0 percent.

The term poverty not only implies having less income than someone else in similar circumstances or less income than one would like, but it means an economic condition of sufficient concern to elicit sympathy from others and possibly to raise the question of social action to correct it. No single definition is possible. Whether one falls below this threshold varies by country, historical epoch, and even among citizens of the same country at a single time. In that regard, scientists or economists cannot define poverty. They can describe only what definition is being measured. Readers will have to decide whether that particular measure conforms to what they consider poverty. My own presumption is that most would agree that a poverty measure that takes into account out-of-pocket medical expenses gets us closer to the “truth” than one that does not.

Christopher J. Conover is a research scholar at Duke University’s Center for Health Policy and Inequalities Research and an adjunct scholar at AEI. The charts shown are from his new book American Health Economy Illustrated, to be released in January 2012 by AEI Press. See PowerPoint version of Figure 13.1a, and Excel spreadsheet on alternative estimates of poverty by age from 2009-2010 for data, sources, and methods.